APPRAISAL OF LOAN...MSME/CCP
The purpose of appraisal of term loan is to ascertain
whether the cash flows (mainly profits) of the firm will be
Appraisal of Term Loan
adequate to repay the term loan in installments over a
repayment schedule.
The cash flows/ profits depend on successful installation
of suitable machinery, the marketability of the products and
profitability of operations. Accordingly, the appraisal of term
loan covers the following stages:
I. Prima facie acceptability
II. Technical Feasibility.
III. Economic Viability
IV. Financial Feasibility.
V. Commercial Viability.
1. Prima facie Acceptability
A proposal, at this stage, needs to be checked to ascertain
if it conforms to the overall guidelines of the Bank. The
proposal is considered prima facie acceptable if it
conforms to:
• RBI guidelines & Govt regulations.
• Bank’s Loan policy guidelines, including prudential
exposure norms, industry exposure norms, takeover
norms, RBI Defaulters List & credit appraisal
standards (e.g. debt:equity ratio).
• The object clause and borrowing powers of the
company.
More than ordinary care should be taken while
entertaining proposals relating to industries (a) which
might face govt / sociological sanctions (e.g. polluting
industries, breweries, projects involving land acquisition
etc (b) whose profitability is not predictable (e.g. feature
films) and (c) where past experience of the Bank has
not been encouraging.
It is also required to examine the managerial competence.
The ‘man behind the project’ should have the necessary
competence to implement the project. His experience,
financial status etc as well as the firm’s organizational
structure, quality of management team etc should match
the demands of the project.
2. Technical Feasibility
Technical feasibility refers to vetting of the proposal to
ascertain if the project is technically capable of producing
the goods for the quantity envisaged. It depends on a
large number of factors of production, suitability of the
machinery and the production process.
The factors to be considered are:
• Location of plant & accessibility to critical inputs
• Size of the plant
• Technical arrangements
• Suitability of technology.
• Manufacturing process
• Availability of skilled labour etc
3. Economic Viability
Economic viability means whether the products of the
firm can be sold at the price and for the volume as
envisaged. It requires a thorough market analysis.
The factors to be examined here are:
• The nature of product (and the extent of regulation
over the product)
Appraisal of Term Loan
• The overall market potential for the product
• The existing level of demand and the likely increase
in demand for the product
• The existing players in the market & the degree of
competition
• The new projects in pipeline
• The areas where the products will be marketed and
the dependence on other industries/markets (as
ancillary industry, export oriented unit, intermediate
product etc)
• Overall demand-supply gap and the future trends in
demand/supply
• Market prospects for the unit
• Selling arrangement
• Pricing policy etc
The projections should be critically examined to rule out
over-ambitious projections, if any. In fact, the projections
should bear a relation to the similar existing units and
allow for uncertainties of a new unit.
4. Financial Feasibility
Financial feasibility refers to examination of the cost of
the project and the means of financing for the project.
The cost estimates of the project should be reasonably
accurate and the pattern of financing of the project should
be sound and acceptable.
Cost of the project includes the following:
• Land (Including site development) and building.
• Plant & machinery.
• Miscellaneous Fixed Assets.
• Technical know-how fees, etc.
• Preliminary & Pre-operative expenses.
• Contingencies.
• Margin on WC requirements (which needs to be
available for the project before it goes for working
capital finance).
Means of Finance for the project are generally the
following sources:
• Equity Share Capital from promoters/other
shareholders.
• Preference Share Capital from Preference
shareholders.
• Debentures.
• Unsecured Loans.
• Deposits.
• Loans from Friends & Relatives.
• Term Loans from Banks & FIs.
• Government subsidies.
• Internal accruals.
Each of the above components of cost of project and
source of finance needs to be critically examined to know
their reasonableness.
5. Commercial Viability
Commercial viability refers to the process of examining
whether the cost and profitability estimates are
reasonable and the cash accrual of the project is adequate
to service the term loan.
The purpose of appraisal of term loan is to ascertain
whether the cash flows (mainly profits) of the firm will be
Appraisal of Term Loan
adequate to repay the term loan in installments over a
repayment schedule.
The cash flows/ profits depend on successful installation
of suitable machinery, the marketability of the products and
profitability of operations. Accordingly, the appraisal of term
loan covers the following stages:
I. Prima facie acceptability
II. Technical Feasibility.
III. Economic Viability
IV. Financial Feasibility.
V. Commercial Viability.
1. Prima facie Acceptability
A proposal, at this stage, needs to be checked to ascertain
if it conforms to the overall guidelines of the Bank. The
proposal is considered prima facie acceptable if it
conforms to:
• RBI guidelines & Govt regulations.
• Bank’s Loan policy guidelines, including prudential
exposure norms, industry exposure norms, takeover
norms, RBI Defaulters List & credit appraisal
standards (e.g. debt:equity ratio).
• The object clause and borrowing powers of the
company.
More than ordinary care should be taken while
entertaining proposals relating to industries (a) which
might face govt / sociological sanctions (e.g. polluting
industries, breweries, projects involving land acquisition
etc (b) whose profitability is not predictable (e.g. feature
films) and (c) where past experience of the Bank has
not been encouraging.
It is also required to examine the managerial competence.
The ‘man behind the project’ should have the necessary
competence to implement the project. His experience,
financial status etc as well as the firm’s organizational
structure, quality of management team etc should match
the demands of the project.
2. Technical Feasibility
Technical feasibility refers to vetting of the proposal to
ascertain if the project is technically capable of producing
the goods for the quantity envisaged. It depends on a
large number of factors of production, suitability of the
machinery and the production process.
The factors to be considered are:
• Location of plant & accessibility to critical inputs
• Size of the plant
• Technical arrangements
• Suitability of technology.
• Manufacturing process
• Availability of skilled labour etc
3. Economic Viability
Economic viability means whether the products of the
firm can be sold at the price and for the volume as
envisaged. It requires a thorough market analysis.
The factors to be examined here are:
• The nature of product (and the extent of regulation
over the product)
Appraisal of Term Loan
• The overall market potential for the product
• The existing level of demand and the likely increase
in demand for the product
• The existing players in the market & the degree of
competition
• The new projects in pipeline
• The areas where the products will be marketed and
the dependence on other industries/markets (as
ancillary industry, export oriented unit, intermediate
product etc)
• Overall demand-supply gap and the future trends in
demand/supply
• Market prospects for the unit
• Selling arrangement
• Pricing policy etc
The projections should be critically examined to rule out
over-ambitious projections, if any. In fact, the projections
should bear a relation to the similar existing units and
allow for uncertainties of a new unit.
4. Financial Feasibility
Financial feasibility refers to examination of the cost of
the project and the means of financing for the project.
The cost estimates of the project should be reasonably
accurate and the pattern of financing of the project should
be sound and acceptable.
Cost of the project includes the following:
• Land (Including site development) and building.
• Plant & machinery.
• Miscellaneous Fixed Assets.
• Technical know-how fees, etc.
• Preliminary & Pre-operative expenses.
• Contingencies.
• Margin on WC requirements (which needs to be
available for the project before it goes for working
capital finance).
Means of Finance for the project are generally the
following sources:
• Equity Share Capital from promoters/other
shareholders.
• Preference Share Capital from Preference
shareholders.
• Debentures.
• Unsecured Loans.
• Deposits.
• Loans from Friends & Relatives.
• Term Loans from Banks & FIs.
• Government subsidies.
• Internal accruals.
Each of the above components of cost of project and
source of finance needs to be critically examined to know
their reasonableness.
5. Commercial Viability
Commercial viability refers to the process of examining
whether the cost and profitability estimates are
reasonable and the cash accrual of the project is adequate
to service the term loan.
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